In the new world of managing your income in retirement, many retirees are looking for a pension drawdown calculator. As the majority of people are deciding against a guaranteed lifetime income, and instead are looking at pension drawdown, it’s important to calculate how long a pension income might last.
The nature of drawdown being an investment, means that no outcomes are guaranteed and these can only therefore be used as a guide to what statistically might happen.
A good pension drawdown calculator will allow you to adjust the factors which determine the outcomes. The starting point should be the size of your pension fund you have to put into pension drawdown.
You should then be able to select your desired income. This is the amount you expect to take from pension drawdown on an annual basis. Once in drawdown you might adjust the amount of income taken based on personal needs or stock market performance. If your funds have been hit by poor stock market performance for example, it would be prudent to reduce the amount of income taken in that year. Unfortunately, a pension drawdown calculator can predict future stock market performance, you can only therefore input your desired amount.
The second important variable will be the investment return the pension drawdown calculator uses to show the length of time your desired income may last.
All pension drawdown providers illustrate 3 separate potential growth rates when providing a ‘quote’. They are bound by regulation to do so and for these to be realistic. Therefore, they won’t show 10%, 12% and 14%, as although this return might be possible in a given year, it’s highly unlikely to be sustainable over the long term. It is more common to show 2%, 5% and 8% for average risk funds.
When using a pension drawdown calculator to illustrate the potential growth of your portfolio, you should take into consideration the types of funds you’ll be investing in. This is to provide a realistic output from the calculator. There is no merit using a 6% growth rate if the portfolio in largely investing in ‘cash’. This level of performance simply isn’t achievable in cash over the long term. If however you have a balanced group of investment with medium risk, a 6% performance level might be possible.
It is always better to be conservative with expected growth. It would be sensible to use 3% to 4% for medium risk funds and then any growth above this is a bonus. A pension drawdown calculator should be used to determine how long a stated income might last, given conservative growth rates. Any unrealistic growth figures used might lead to unsustainable income and ultimately running out of income.
When considering the growth rate to use, it’s important not to use past performance as a guide. Past performance is no guarantee of future performance. Most funds show past performance up to 5 or 10 years. Since the 2007/8 stock market crash, many funds have been on bullish runs, practically over performing as they have clawed back the loss during that period. The past performance is therefore not ‘normal’. There is an argument to say that we haven’t had ‘normal’ market conditions for the past 15 years, however, you should still ignore using past performance as your only guide to what your fund or portfolio might achieve.
So when using a pension drawdown calculator, you can input the fund value, income and growth rates to achieve a ‘perfect’ scenario based on these factors. The one element you can’t input is volatility.
We know stock markets are volatile. We know they go up and go down. We know there is generally a cycle or pattern to this. We just don’t know when it’s going to happen.
Volatility, can change the outcome massively when using a pension drawdown calculator. If the volatility means a dip in the first few years rather than a rise, it can reduce the sustainability of a fund by years not just months.
There are some great pension drawdown calculators available both by providers and independent sites.
Here are our top 5 pension drawdown calculators.
Our pension drawdown calculator will in the first instance show you the best drawdown providers for your fund size. You can then see how long your fund may last, taking into consideration the different providers. Obviously the providers with larger ongoing cost won’t last as long as those with lower costs. You can change the expected growth rate and income taken. The results are displayed on a graph.
Although this pension drawdown calculator doesn’t offer the visual experience of the others on this list, it’s the most specific. You can enter fund charges, inflation, income, adviser charges and so on. This would be a good calculator to use once you know the finer details of your portfolio and their charging structure.
This pension drawdown calculator from Fidelity requires little input but displays 3 separate potential growth rates. After inputting your age and fund size it shows how long a drawdown plan might last based on poor average and good performance. It offers a slider to change the income.
The consumer site Which has put together an easy to use tool that makes assumptions based on your input portfolio diversification. You can choose how much cash, fixed interest and stocks and shares you intend your portfolio to hold. It will then assume a growth rate to be applied.
This calculator looks at the sustainability of income taken which is equal to that which could be obtain through purchasing an annuity. Importantly it includes an assumption on how long you will need to draw the income (or survive to put it another way). Just Retirement have been using medical data to offer annuities for years and therefore their assumptions are as good as anyone’s.